Option Investor

Daily Newsletter, Wednesday, 5/10/2017

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Indexes Battling Resistance

by Keene Little

Click here to email Keene Little
This week has the major indexes battling what could be strong resistance but so far they show no intention of pulling back. This is a potential turn week for the market and that has resistance levels important to watch.

Today's Market Stats

Following Tuesday morning's high we've had only a small pullback that was followed by another bounce attempt today. The major indexes closed in the green but other than the RUT's stronger performance (+0.6%) the rally attempt was weak. The Dow was the weaker index as Boeing (BA) and Disney (DIS) pulled the index down and kept it in the red.

There were no significant economic reports to distract the market this morning and it suffered a further pullback before bouncing back up. The report on crude inventories, which showed a larger decline, sparked a rally in crude prices and that's usually helpful for the stock market, especially the small caps (which benefits from the smaller companies in the oil sector). But as I'll review with its chart, even oil has made it back up to what could turn into strong resistance.

The major indexes are pushing up against what will potentially be strong resistance levels. With a rally that appears to be running out of steam there's a good chance resistance is going to hold, although I see the potential for at least minor new highs. In addition to resistance levels, which I'll review on the charts, this week is a potentially important turn week.

Today we have a full moon and we've had more than a few important highs (and lows) on the full and new moons. There is also an important cycle turn date tomorrow and at the moment it's looking like we have price, pattern and time coming together this week for what could be an important high for the market. But there's no evidence yet that a high is in place and for the moment the bulls still rule.

I've been reading reports lately about the support that the global stock markets have been receiving from the world's central banks. Between this kind of support and the continuing effort by companies to buy back their own stock it's been tough for bears to do anything with this market. That could continue for much longer than seems possible but eventually even this rally is going to experience a more significant decline.

The central banks have been quite public about their support for the stock market. The central banks are of course fighting to boost their economies and to a large extent that requires consumers to consume. One way to accomplish that is to get consumers to feel good about the economy and a higher stock market theoretically helps that.

There is also an effort by the central banks to improve the returns on their own money and since the stock market always goes up (cough) they figure it's a safe investment. The problem is most of their investing has been in the tail end of the bull market and therefore they're buying the highs (with the belief the market will simply head higher).

As an example, the Swiss National Bank (SNB) has also been a heavy buyer of the stock market and especially in the last quarter. Many well-heeled investors put their money into the Swiss banks and currency since it's theoretically a safer place to park your money. But with their banking system heavily invested in the stock market it certainly prompts the question about how safe their banks will be in the event their investments start to lose money.

The chart below shows the stocks that the SNB is mostly invested in and compares Q1 2017 holdings to Q4 2016. The numbers are times a million so $2700 in AAPL stock is actually $2.7B invested. They added about $1B in just AAPL stock in the first 3 months of this year and certainly helped the stock's performance this year. As you can see in the chart, SNB poured more money into the stock market in the 1st quarter than they did in Q4 2016. What could possibly go wrong with this picture?

Swiss National Bank stock holdings, Q4 2016 - Q1 2017, chart courtesy stansberryresearch.com

Warren Buffett recently announced the fact that he's holding a larger position in AAPL and the combination of "heavy hitters" has certainly helped the stock outperform to the upside. AAPL is up nearly +50% since November, which is considerably better than the +15% for SPX over the same time period. The techs have of course been helped and NDX has enjoyed a +22% rally since November.

AAPL has clearly been on a tear but what happens if these central banks become spooked with any kind of decline. Will they not just withdraw their support but also become big sellers? Can you imagine being a money manager for a central bank and having them breathing down your neck when their investments start losing value?

Before getting into a review of the major indexes I wanted to take a little time to review AAPL since it's been one of the strong drivers behind the rally we've seen and what happens in the near future could help determine market direction. A big-picture view of AAPL is shown with its monthly chart below.

Apple Inc., Monthly chart

AAPL's stock really took off from the lows hammered out in 2000-2003, when you could have bought it for a split-adjusted price near $1 (you can take out the butt-kicking machine now). Even though the stock continued to rip higher after pulling back into the January 2009 low (another butt-kicking for not buying the stock at the split-adjusted price of $11) you can see how the rally is "rounding" over and is showing monthly bearish divergence since early 2012. Whether or not the stock is peaking here is arguable but the rolling top pattern suggests it will peak here.

Apple Inc., Weekly chart

It's arguable that the completion of AAPL's rally was actually the April 2015 high (the completion of a 5-wave move up from 2003) and the rally from May 2016 is only a corrective move within what will become a larger pullback pattern. The weekly chart of AAPL, shown below, shows a 3-wave move up from May 2016 and as such it could be the b-wave of what will become a larger 3-wave pullback from April 2015. The projection at 151.35, shown on the chart, is where the 2nd leg of the move up from May 2016 is 162% of the 1st leg.

At this point the 3-wave move up from May 2016 is either a bearish a-b-c or a bullish 1-2-3 and we won't know which it is until we see the next pullback/decline. A multi-week/month choppy pullback would suggest a 4th wave to then be followed by another rally later this year. A sharp impulsive move down would suggest we're going to see a much strong decline for the rest of this year (down to at least the May 2016 low near 89). And then maybe after that we'll see another rally back up to the rounding topping pattern shown on the monthly chart.

Jumping into the major indexes, I'll start with the NDX since it's been the leader to the upside. It's also been benefitting from AAPL's rally. After it tops out it will likely provide an important clue for the rest of the market.

Nasdaq-100, NDX, Daily chart

As I've reviewed in the past for NDX, there were a few price projections that pointed to a 5654-5690 target zone and the high end of the zone was achieved with Tuesday's high at 5691.

As a quick review of its larger pattern, NDX has a 5-wave move up from November 2008, with the 5th wave being the rally from February 2016. It equals the 1st wave (November 2008 - April 2012) inside the target zone, at 5664. Once this 5th wave (the rally from February 2016) completes we will be set up for a much larger decline, even if it's going to be "just" a bear market correction to the bull market run from 2008.

The 5th wave (the rally from February 2016) is also a 5-wave move (the fractal nature of the market) and its 5th wave is the leg up from November 2016. This smaller 5th wave extended (it's larger than normal) and a common projection is where it equals the 1st through 3rd waves, which is where the 5654 projection comes from.

Now looking at the rally from November 2016, it too is a 5-wave move and once again the 5th wave has extended. Because the 3rd wave also extended I look for a price projection based on 162% of the 1st wave. This all sounds complex but I basically take each 5-wave move and figure out price projections based on the count. The 162% projection for the 5th wave of the rally from November 2016 points to 5690.46, which is the projection shown on the daily chart below. This is the high end of the 5654-5690 target zone that I've been looking for. Note also that the 5690 projection crosses the trend line along the highs from November 2014 - July 2015 this week.

Key Levels for NDX:
- bullish above 5690
- bearish below 5608

Nasdaq-100, NDX, 60-min chart

Now we zoom in closer to the 5th wave of the rally from November 2016 with the 60-min chart below, which is the leg up from April 13th. Once again this smaller-degree 5th wave is a 5-wave move, shown on the chart. Once again the 5th wave of the rally from April 13th extended and again I then look for a projection where the 5th wave equals 162% of the 1st wave.

The 162% projection points to 5689.31 and the fact that it fell on top of the larger-degree extended 5th wave (at 5690.46) has it looking like it's an important level to watch carefully. Notice the bearish divergence since MACD peaked on April 25th, which shows the slowing momentum of the rally. We have the pieces in place to call a high at any time and now we wait for the market to tell us whether or not it will top out near here.

S&P 500, SPX, Daily chart

On Tuesday SPX poked above its March 1st high, near 2401, but was not able to hold it. It remains to be seen whether or not we're seeing a double top in the making, with bearish divergence against the March 1st high, but that's the bearish setup here. Is SPX is able to push a little higher we could see it make it up to about 2415 where it would run into the trend line along the highs of the rally off the March 27th low.

Key Levels for SPX:
- bullish above 2415
- bearish below 2379

Dow Industrials, INDU, Daily chart

The Dow has been struggling to get out of its choppy sideways price action that it's been in since April 26th. If it's been in a bullish continuation pattern since that date we'll see a breakout to the upside and while I have trouble seeing the Dow heading up to 21539 (for two equal legs up from April 19th) that remains upside potential. That would get the Dow up to its trend line along the highs from May 2011 - December 2014, currently near 21450. The bears want to see the Dow below its crossing 20- and 50-dma's, near 20820 and 20795, resp., and then break its uptrend line from November-April, currently near 20750.

Key Levels for DOW:
- bullish above 21,170
- bearish below 20,775

Russell-2000, RUT, Daily chart

At its April 26th high, near 1426, the RUT had again tested its trend line along the highs from 2007-2015. This is arguably the top of a larger megaphone topping pattern (the bottom of the pattern is a trend line along the lows from February 2014). The top of the megaphone, using the log price scale, is approaching 1429 and remains the upside target if another rally can kick into gear.

When switching the chart to arithmetic price scale it shows the 2007-2015 trend line near 1400 and is once again acting as resistance after breaking last week. The RUT has been finding support at its 20-dma, riding up it since its May 4th low. The choppy bounce pattern looks like a correction to the decline from April 26th and two equal legs up for the bounce points to 1403.67, which is near the 50% retracement of its decline.

A rally above 1404 would therefore suggest another rally to 1429 is possible. But at the moment the RUT is facing resistance with a choppy bounce pattern that looks more like a bear flag than something more bullish. The bulls want to see the RUT above 1404 while the bears want to see it below 1378.

Key Levels for RUT:
- bullish above 1430
- bearish below 1378

Volatility index, VIX, Daily chart

While the indexes battle potentially significant resistance the VIX hit support at the bottom of a large descending wedge from 2015, at 9.77. It poked below the bottom of this wedge on Monday and Tuesday but closed at or back above the line. Tuesday's low was 9.56 but it closed at 9.96 following Monday's close on the line. It's possible this is the little throw-under completion to the pattern and now we'll see the VIX start to climb back up.

It's important to recognize that a climbing VIX, if that's what we see happen from here, is not necessarily a rally killer for the stock market. A rising VIX will show more fear entering the market but as we've seen at prior VIX bottoms, it's been common for the stock market to make a final high weeks, if not months, later. That could happen again but of course there are no guarantees that the market will ignore a rising VIX and keep rallying anyway.

KBW Bank index, BKX, Daily chart

The banks have been neither strong nor weak since BKX hit a high at 93.67 on April 26th. The sideways consolidation can easily be interpreted as a bullish continuation pattern, which points to another leg up to at least the March 1st high at 99.77. BKX is struggling to punch through its broken 50-dma, currently near 92.75 and today's close was 92.60.

A sustained break above 93.75 would bullish for at least another few weeks whereas a break below its 20-dma, near 91.38 on Thursday, would likely lead to a sharper decline. Another leg down would help create the right shoulder of a H&S topping pattern but that's yet to be proven. The neckline is currently near 86.85. In any case, follow the money whichever direction it breaks.

U.S. Dollar contract, DX, Daily chart

The US$ has shown us a series of lower highs and lower lows since its January 3rd high, which is the definition of a downtrend. But the pattern for its decline could be considered a bullish descending wedge, which is showing hints of bullish divergence. A break out the top of the wedge, currently near 100.36, would also be rally back above its broken 50-dma, which is dropping and currently near 100.06.

However, following the April 24th break of its uptrend line from May-August 2016 it's only been able to back-test the broken trend line since then. That includes the back-test on Tuesday and today, at 99.57, with its high at 99.61. We wait now to see whether the bearish or bullish pattern will be confirmed. If the dollar drops below Monday's low at 98.35 and stays below the bottom of the descending wedge it would leave behind a failed bullish pattern and would likely lead to a stronger decline.

Gold continuous contract, GC, Daily chart

Gold is approaching price-level support near 1205 and its pattern looks like it should find a tradable bottom soon. The decline from April 17th looks impulsive, which suggests another leg down following a bounce correction. Assuming it will soon find support to complete the leg down from April 17th, it will become a question about how high the bounce will go. It's anyone's guess but for now I'm depicting a bounce back up to the 1250 area where it would run back into its 20-, 50- and 200-dma's, which will likely be crossing around that level in a couple of weeks. For those interested in buying gold for a long-term hold position I think we'll see lower prices this year.

Oil continuous contract, CL, Daily chart

Today oil rallied up to its broken uptrend line from August 2016 and then pulled back. The bounce off its overnight low at 43.76 on May 4th would achieve two equal legs up at 48.75, which would also be a test of its broken 20- and 200-dma's. But if today's back-test is followed by selling it will leave a bearish kiss goodbye at support-turned-resistance. How oil trades from here could be a good indicator for the direction of the RUT and possibly the broader market.

Economic reports

Thursday's economic reports will include PPI data, which is expected to show a higher inflation rate in April than was reported for March. Any further slowdown in inflation would spark further conversation about whether or not the Fed will raise rates further in June.

On Friday, in addition to further inflation data with the CPI numbers, we'll also get retail sales data, which are expected to have improved in April over March. A negative surprise would tell us the consumer is not spending money and that would spark slowdown concerns


With several indexes bumping up against resistance while showing slowing momentum it's going to be important to see what the bulls can put together for the rest of the week. I see at least a little more upside, such as to SPX 2415, before turning back down into at least a larger pullback correction. But as laid out for NDX, there is the potential that we've seen the highs or will in the next day or two.

With price projections met, resistance lines being hit, price patterns that can be viewed as completed wave counts and a time window this week (full moon and an important cycle turn date) we have the pieces in place for an important market high. What we don't have is any evidence of a reversal and that keeps the bulls in charge until a top is more evident.

If the market rolls over it will then be important what kind of pullback/decline develops. If we get another multi-week choppy pullback (corrective wave count) we'll then know to expect higher prices into next month. But if the decline turns into a sharp impulsive move then we'll have evidence of a trend change. Until we see what happens after a top is in place we can't know what the larger pattern is and that means trading should be kept short term.

I think it's risky chasing the market higher and stops on long positions should be trailed and kept tight. Let the bulls prove they have more from here. Otherwise I sense there are some hungry bear ready to pounce.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

New Plays

Repeat Position

by Jim Brown

Click here to email Jim Brown
Editor's Note

We exited Habit Restaurants before earnings but it is time to bring it back. They reported good earnings and closed at a new high today.


HABT - Habit Restaurants - Company Profile

The Habit Restaurants, Inc., a holding company, operates fast casual restaurants under The Habit Burger Grill name. It specializes in offering fresh made-to-order char-grilled burgers and sandwiches featuring choice tri-tip steak, grilled chicken, and sushi-grade albacore tuna cooked over an open flame; and salads, as well as sides, shakes, and malts. As of March 2, 2017, the company operated approximately 170 restaurants in 15 locations in California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Nevada, Washington, and Maryland, the United States; and the United Arab Emirates. The Habit Restaurants, Inc. was founded in 1969 and is headquartered in Irvine, California. Company description from FinViz.com.

Habit reported revenue of $78.6 million that increased 17.4%. Earnings were 9 cents. Same store sales rose +0.9% despite the flooding in California in Q1. That is where they have the most stores. This was their 53rd quarter of consecutive same store sales growth. They opened 3 new stores in the quarter to total 165 company operated locations and 13 franchised locations.

They guided for the full year for revenue of $338-$342 million. Same store sales of 2%. They will open 31-33 company operated stores and 5-7 franchised stores.

The company had $49.5 million in cash and no debt other than $9 million in short term lease-financing costs for stores under construction.

Earnings August 2nd.

Habit dies not suffer from the same discounting problem afflicting other QSR chains. Habit has a solid repeat customer base and they keep this base faithful by offering new premium menu items on a limited time basis every few weeks. By introducing short term premium specials they attract customers back into the stores every time. That creates repeat business between the announcement of new menu items. By not continuing them on the menu, it keeps their inventory costs lower and causes people to rush in to get the next special because they know it is going away.

They implemented digital advertising program during the quarter and expanded their email mailing list from 278,000 to 538,000 using a promotion for a free Charburger. The redemption rate was 49%, which is unheard of in fast food retailing. The average amount spent when customers redeemed the special was $3.85, which consisted of additional high profit items like fries and drinks. In reality, the special had no material cost and doubled the size of their email list.

It appears HABT shares are about to break out to a new leg higher after the two week pause for earnings.

Buy HABT shares, currently $19.55, initial stop loss $18.25

Optional: Buy Sept $21 call, currently $1.05, initial stop loss $18.25.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

Ignoring the Dow's 90-point intraday decline, it was a good day for small caps. The Dow recovered to close down only 32 points and while the Nasdaq gains were muted they were still gains. The big cap techs were struggling to retain their upward momentum. Netflix was the only FAANG stock that posted a gain.

The small cap indexes recovered to close at a six day high with the Russell gaining nearly 8 points. The S&P-600 broke slightly over the resistance at 850. If this is not just a one-day wonder and small caps rise again on Thursday, it could lift the broader market. However, the Dow needs to get well and start posting gains again or it will not matter what the small caps are doing.

With the Russell up strongly today, all our positions posted gains. Unfortunately, all of the shorts posted gains as well.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

No Changes

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

BBRY - Blackberry - Company Profile


No specific news. New 52-week high.

Original Trade Description: April 28th.

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Update 5/4/17: TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Earnings June 30th.

Position 5/1/17:

Long BBRY shares @ $9.34, see portfolio graphic for stop loss.

Optional: Long July $10 call @ 35 cents. No stop loss.

FNSR - Finisar Corp - Company Profile


No specific news. New two-week high.

Original Trade Description: April 24th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

We played Finisar several weeks ago and got caught in the downdraft on China worries. Reports out of the sector suggested orders from China had slowed. Shares crashed from $35 to $21 over the period of about six weeks. Raymond James said the selloff is overdone and the worries over China are overblown.

China is on track to network 120 major cities with populations of more than one million. That will take a lot of networking gear. The directives have been given from the governmental level but the actual orders will come from the provincial level. Bids for routing and wireless components have already been submitted and optical equipment is expected to be next in line.

Raymond James said Finisar has the most upside potential with a target of $39 and is cheap with a PE of only 9 times 2018 earnings estimates.

Shares have rebounded the last two days after the Raymond James note to investors.

Earnings June 8th.

Update 4/26/17: The U.S. government expanded its investigation regarding compliance with sanctions programs against Iran, Cuba, Sudan and Syria. The target is China-based Huawei but OCLR, ACIA, LITE and FNSR have similar operations. Last month ZTE, a peer to these companies, pleaded guilty and faces fines of $1.2 billion. If the government is going name by name in their investigation, investors may reconsider their ownership of these companies. At least one analyst said today's dip on sector related news rather than company specific, was overdone.

Update 4/28/17: Stifel Nicolaus lowered their price targets on LITE, FNSR, FN and OCLR but maintains a buy rating. The new target on FNSR declined from $39 to $33 with shares at $23. The analyst cut the targets based on the slowness in bid requests from China's governments on the 120 city networking project.

Update 5/5/17: Nice gain on unusual option activity. More than 6,800 May $24 calls traded against an open interest of 2,800, which means they were bought at around 75 cents each. Another 2,000 May $25 calls were bought at 45 cents. That is a total of $600,000 in premium when the normal volume is only a couple hundred contracts. Somebody is betting big on a short fuse with only two weeks to go.

Position 4/25/17:

Long FNSR shares @ $23.10, see portfolio graphic for stop loss.


Long June $25 call @ $1.20, see portfolio graphic for stop loss.

STM - STMicroelectronics - Company Profile


No specific news. New high today.

Original Trade Description: May 6th.

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest semiconductor maker. They posted a surge in revenue growth after six years of declines thanks to IoT, phones, automotive and industrial demand. Revenue is expected to grow 12.3% in Q2 and the company said it was on track to meet 2017 objectives. The CEO said, "Entering the second quarter, we continue to see healthy demand, with strong booking trends across all our product groups and regions."

They reported revenue of $1.821 billion that rose 12.9% and matched analyst estimates. Earnings of 12 cents missed estimates for 14 cents. The company said it would webcast its Capital Markets Day on Thursday.

Earnings July 27th.

Shares closed at a new high on Friday and the turnaround excitement is building. A positive analyst day on Thursday could send it higher. Shares rallied from November through February and then went dormant in Mar/Apr. Now that the consolidation is complete, they are surging again.

Position 5/8/17:

Long STM shares @ $16.34, see portfolio graphic for stop loss.

Optional: Long July $17.50 call @ 65 cents, no initial stop loss.

USO - US Oil Fund ETF - ETF Profile


Inventories declined for the fifth week and the 5.2 million barrel drop was more than expected. Oil prices spiked $1.43.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season. Hopefully those declines will begin soon and the repair process can begin.

Original Trade Description: April 22nd.

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Oil prices fell -6% last week after Wednesday's inventory report failed to show a significant decline in crude inventories. Complicating the problem was the expiration of crude futures on Thursday. That means everyone long for the EIA report had to dump their position immediately to avoid expiration.

I expect the price of crude to return to $54 over the next several weeks. That equates to $11.25 or higher on the USO ETF. The ETF closed at $10.32 on Friday. I am recommending we buy the $10.50 call, currently 42 cents and plan to double our money and exit.

Oil prices will rise because refineries are restarting production after their normal two-month maintenance period centering on March. Oil inventories will begin to decline sharply in the coming weeks as they begin to fill the system with summer blend fuels before Memorial Day.

You could also just buy the USO ETF for $10.32 but you will get a better return using the option. I would not recommending buying a $10 stock with the intention of making 75 cents.

Update 5/8/17: Saudi's oil minister, Khalid al-Falih, said "after conversations with participants, I am confident the production cut agreement will be extended for another six months and possibly beyond." The OPEC meeting is May 25th and we should be getting almost daily headlines ahead of that event.

Position 4/24/17:

Long Jun $10.50 call @ 40 cents, no stop loss.

WLL - Whiting Petroleum - Company Profile


No specific news. Minor gain despite the rise in oil prices.

Original Trade Description: May 1st.

Whiting Petroleum Corporation, an independent oil and gas company, engages in the development, production, acquisition, and exploration of crude oil, natural gas liquids, and natural gas primarily in the Rocky Mountains region of the United States. It sells oil and gas to end users, marketers, and other purchasers. As of December 31, 2016, the company had total estimated proved reserves of 615.5 million barrels of oil equivalent; and interests in 1,917 net productive wells on approximately 517,200 net developed acres. Whiting Petroleum Corporation was founded in 1980 and is based in Denver, Colorado. Company description from FinViz.com.

Whiting reported an adjusted loss of 15 cents and analysts were expecting a loss of 22 cents. Revenue of $371.3 million beat estimates for $361.4 million. Production of 10.6 million Boe beat guidance of 10.4 million Boe. Lease operating expenses declined from $9.00 to $8.56. General and administrative expenses declined from $3.15 to $2.34 and interest expenses declined from $4.80 to $3.83 per share.

Earnings July 26th.

The company raised guidance for the year for multiple reasons. They just completed a three-well Loomer pad in North Dakota using advanced completion models with longer laterals and 8.9 million pounds of sand in each well. The resulting production suggests each well will produce 1.5 million Boe over their productive life. That is 50% higher than other wells in the area. That equates to roughly $75 million in revenue from each well with an initial cost of about $9 million each.

Whiting plans to apply this completion method to all its 2017 wells while continuing to test and improve on the model.

Also helping Whiting is the recently completed Dakota Pipeline that President Trump approved a couple months ago. That makes it considerably easier to transport oil out of the Bakken and at a lower cost.

Whiting raised full year guidance to 45.2 to 46.2 million Boe but did not raise the capex expectations. The production guidance was raised because of the better completion methods. This will be a 23% increase in production from Q1 start to Q4 end.

Energy companies have been hammer recently with oil prices falling back under $50. This is a temporary situation. The refinery maintenance cycle was longer than normal and the restart just accelerated over the last two weeks. Inventories last week declined -3.6 million barrels and they should continue to decline sharply over the next four months. Prices will rise as the summer driving season begins.

I think the September $9 option is too expensive at $1.13 and the $10 option is expensive as well. The June options are a short fuse with earnings after expiration. The tradeoff suggests the short term June would be the best play.

Position 5/2/17:

Long WLL shares @ $8.55, see portfolio graphic for stop loss.
Optional: Long June $9 call @ 60 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

ERA - Era Group - Company Profile

Era Group Inc. provides helicopter transportation services primarily to the oil and gas exploration, development, and production companies. Its helicopter services include emergency response search and rescue; air medical services; Alaska flightseeing tours; and other services, as well as utility services to support firefighting, mining, VIP transport, power line, and pipeline survey activities. The company also leases helicopters to third parties and foreign affiliates; engineers, manufactures, and distributes after-market helicopter parts and accessories; and provides classroom instruction, flight simulator, and other training services. As of December 31, 2016, the company owned, leased, or managed a total of 136 helicopters, including 13 heavy helicopters, 49 medium helicopters, 33 light twin engine helicopters, and 41 light single engine helicopters. It also serves cruise line passengers. Company description from FinViz.com.

Era reported a loss of 27 cents on revenue of $54.5 million. This was the second quarterly revenue decline but revenues have been weakening for the last two years. The last quarter they posted positive earnings was June 2016 and the losses are growing. In this table from Capital Cube all the numbers look terrible.

Earnings August 1st.

I am frustrated because I almost recommended them in the weekend newsletter. I decided to wait until support broke at $11.50. That support failed today with a big drop. I believe the shares are going to retest the November lows at $7.50. After looking at that table above would you buy this stock?

Position 5/9/17:

Short ERA shares @ $10.69, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

VXX - Volatility Index Futures - ETF Description


Only a minor rebound from the record low close. If the market bullishness continues, the VXX should continue to bleed points. Long term, the VXX always goes down.

Original Trade Description: April 12th.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong market gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

We know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.

WLB - Westmoreland Coal - Company Profile


No specific news. I am recommending we close this position. We lost 34 cents of our gains today. I do not want to risk turning into a loss. We have to be out on Friday anyway to avoid earnings.

Original Trade Description: May 3rd.

Westmoreland Coal Company, through its subsidiaries, operates as an energy company. The company operates through Coal - U.S., Coal - Canada, Coal - WMLP, and Power segments. It produces and sells sub-bituminous coal and lignite to power plants. The company owns and operates coal mines in Montana, North Dakota, Ohio, and Texas, the United States; and Alberta and Saskatchewan, Canada. It has total proven or probable coal reserves of approximately 888,202 thousands of tons. The company is also involved in the production of electricity. It operates two coal-fired power generating units with a total capacity of approximately 230 megawatts in Weldon, North Carolina. Westmoreland Coal Company was founded in 1854. Company description from FinViz.com.

Westmoreland shares spiked from $8 to $20 post election and the excitement has left the stock in the recent months. Westmoreland was trading below $4 when Trump began his rise in the polls talking about putting coal miners back to work. Now that the excitement is fading I would not be surprised to see shares return to $4.

The coal sector is on life support. Cheap natural gas burns cleaner, is easier to transport and there is no storage required. Coal is dirty, requires long trains traveling halfway across the country and large rail yards and storage yards to hold the inventory. As long as gas remains under $5, currently $3.22, that will be the fuel of choice.

Westmoreland has a little more going for it because it owns two power plants but it is still losing money on coal.

They recently reported a loss of 41 cents on revenue of $392.7 million. For the full year they lost -$1.47 per share. They are being forced to restate earnings because of past problems.

They guided for a weak 2017 and said two supply contracts had expired. Warmer weather was also weakening demand.

Earnings June 27th. (revised to May 15th)

Shares are $10.25 with support at $8.50 but that support was based on expectations for Trump to win the election. The expectations that coal use would somehow miraculously rebound have now evaporated.

Position 5/4/17:

Short WLB shares @ $10.16, see portfolio graphic for stop loss.

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